Austrian Scholars Conference 8

Ludwig von Mises Institute

March 15-16, 2002

CHICAGO AND MYTH OF EFFICIENT GOVERNMENT

Thomas J. DiLorenzo*

The late George Stigler took the Chicago School perfect markets model to its

logical extreme when, in a 1992 article in the Journal of Law and Economics, he declared

that: 1) Politics is just another market, complete with “buyers and sellers of legislation”;

and 2) All long-lived governmental institutions are therefore “efficient” by virtue of their

having survived for a long time.1 Another Chicago School scholar, Donald Wittman,

goes even further, calling government failure a “myth” and asserting that democratic

government unequivocally promotes the welfare of all citizens.2 The free market may

never meet the perfectly competitive ideal but democratic government, to these two

scholars, is Pareto optimal.

This paper argues that while there are a few transparent similarities between

politics and markets, the fundamental differences between them render the

Stigler/Wittman view that politics is “just another market,” and therefore always

“efficient,” dubious at best. Markets are not perfect in any neoclassical sense (nor is

anything else on earth, for that matter), and neither is democracy. The Stigler/Wittman

1
George Stigler, “Law or Economics?”, Journal of Law and Economics, vol. 35 (October
1992), pp. 455-468.
2
Donald Wittman, The Myth of Democratic Failure (Chicago: University of Chicago
Press, 1995).
 2

view is based on a false view of how both markets and governments operate and also

suffers from being ahistorical

EFFICIENT GOVERNMENT?

Stigler may have had a reputation as a free-market champion of individualism but,

ironically, his argument about “efficient” government was based on methodological

collectivism. Rather than examining the behavior of individual actors, even in their roles

as members of political interest groups, Stigler posited that “society,” not individual

decision makers, makes political choices:

[I]n policy analysis, one may legitimately employ an alternative definition

of efficiency that rests on the goals adopted by the society through its
government. When a society wishes, for example, to give more income to
a group than the market provides, we may surely analyze the efficiency
with which this is done. In this . . . view, every durable social institution
or practice is efficient, or it would not persist over time.3

This means that all common and statute law “must be efficient.”4 Stigler’s

Exhibit A in his catalogue of “efficient” government programs is the sugar price support

program, which at the time (1992) was responsible for the transfer of more than $3

billion annually from sugar consumers to a small handful of politically-influential sugar-

growing corporations. The program was necessarily efficient, said Stigler, because it had

met the test of time: it had been around for 50 years. In keeping with the Chicago

3
Stigler, “Law or Economics,” p. 459.
4
Ibid. Research in law and economics casts doubt on the notion that even the common
law is efficient, however. Paul Rubin and Martin Bailey have shown, for example, how
tort lawyers have shaped modern product liability law to benefit lawyers primarily, and
not even the victims of product liability problems. See Paul Rubin and Martin Bailey,
“The Role of Lawyers in Changing the Law,” Journal of Legal Studies, vol. 23, June
 3

tradition of empiricism, this would suggest that Soviet communism, which at the time of

Stigler’s article was 75 years old, was exactly 50 percent more efficient than the U.S.

sugar price support program.5

India is the world’s largest democracy and has maintained more or less the same

socialist institutions for more than 50 years. By Stigler’s (and Wittman’s) standards,

India is arguably the largest purveyor of governmental “efficiency” in the world. Slavery

existed for over 80 years under American democracy, which would presumably make it

60 percent more efficient than the sugar program.

Stigler’s model explicitly assumes that there is little or no agency cost problem --

no separation of ownership from control -- when it comes to the relationship between

citizens and government. Goals are adopted by “society” through its government, and as

long as those goals are pursued for a long time they are necessarily “efficient.”

Moreover, the goals that government sets for us are said to be exceptionally

“authoritative,” even though no explanation is given by Stigler for the source of this

authority.

Chicago School scholars accept competitive equilibrium as their ideal benchmark

and, as such, they also accept the whole framework of welfare or market failure

economics, including the supposed necessity of antitrust regulation. But in Stigler’s

model there is no corresponding government failure: government is essentially perfectly

competitive. Politicians faithfully pursue the goals of “society” in an efficient manner.

1994. Peter Huber comes to a similar conclusion in his book, Liability: The Legal
Revolution and its Consequences (New York: BasicBooks, 1988).
5
Stigler did not explicitly state that he was restricting his comments to democratic
governments.
 4

Stigler was obviously aware of the voluminous public choice or government

failure literature -- he had published several articles in Public Choice -- but his argument

ignores it completely. (Oddly, he listed The Calculus of Consent by James Buchanan and

Gordon Tullock, and An Economic Theory of Democracy by Anthony Downs -- two

classics in public choice -- in his references, but does not discusses them, or public

choice in general, in the text of his article. Many of his references, in fact, seem to have

no relation to the discussion in the text of his article.)

FORCED LABOR AND EFFICIENT GOVERNMENT

Government power rests primarily on its use of threats, intimidation, coercion, violence,

propaganda, and fraud. If one protests the wastefulness of the sugar price support

program, Pentagon fraud, the welfare state, or anything else by refusing to file a tax

return, for example, the result will at first be threatening letters, then intimidating

demands for payment, and ultimately the use of armed force to confiscate the protester’s

assets and/or throw him into prison. The fact that citizens do not revolt and overthrow

their governments very often does not mean that they consent to being plundered. As

David Hume once once pointed out, the fact that a conscripted sailor does not jump

overboard and commit suicide does not mean that he consents to being conscripted.6

Secession from the corrupt, rent-seeking society that is lorded over by the federal

government can also be risky and life threatening, as the Southern Confederates learned

more than 135 years ago. Although modern historians usually ignore it, the Confederate

Constitution sought to limit the domain of government much further than the U.S.
 5

Constitution did by outlawing protectionist tariffs and the use of taxpayer funds for

corporate subsidies and eliminating the General Welfare Clause of the U.S. Constitution,

among other things.7 But protectionist tariffs, subsidies to railroad corporations, and

central banking (which most Southern statesmen also opposed) were the keystones of the

1860 Republican Party platform. Consequently, Abraham Lincoln waged a bloody war

in which one out of every four white Southerners between the ages of 20 and 40 was

killed by the federal government in order to “save the Union.” This phrase was Lincoln’s

euphemism for creating a centralized state that overthrew the smaller, more decentralized

system of government that had been created by the American founding fathers.8 The

right of secession, which many of the founding fathers considered to be “the” principle of

the Revolution of 1776, was destroyed, along with the Jeffersonian doctrine of states’

rights as a check on the overreaching powers of the central government.

The Jeffersonian dictum enshrined in the Declaration of Independence that

governments derive their just powers from the consent of the governed was essentially

overturned by Lincoln’s war. Southerners no longer consented to be governed by

Washington, D.C., and they were forced into an association with that government at

gunpoint. From that point on, the American government became more and more the

master, rather than servant, of the people.

6
David Hume, “Of the Original Contract,” in A. MacIntyre and D. Hume, eds., Hume’s
Ethical Writings (New York: Collier Books, 1965), p. 263.
7
Thomas J. DiLorenzo, The Real Lincoln: A New Look at Abraham Lincoln, His
Agenda, and an Unnecessary War (New York: Forum/Random House, 2002).
8
Lincoln’s position was always that his “paramount objective’ was to “save the Union,”
even if he could do it without freeing a single slave. His only use of the slavery issue, he
repeatedly stated, was as a propaganda tool in the service of his overriding objective,
consolidating governmental power in Washington, D.C. by destroying the right of
secession.
 6

It is this kind of violence, force, and coercion that lies behind and supports “long-

lived government programs.” There were no long-lived income transfer programs prior to

the War between the States. By ignoring this history the Stigler/Wittman theory of

governmental efficiency implicitly assumes that forced labor (to pay taxes) is an

efficiency-enhancing institution since that is what allows special-interest programs to last

for decades despite their inefficiencies and injustices. Indeed, it is fair to say that forced

labor is a prerequisite for Stigler’s brand of governmental “efficiency.”

Products or practices that last a long time in private markets can be said to be

efficient in that they assist market participants in coordinating their plans better than any

alternative arrangements. In government, the income-transfer programs that Stigler and

Wittman think are “efficient” can only last if threats, intimidation, fraud, and violence are

used to keep them in place. The fact that such tactics must be used is evidence of how

grossly inefficient such acts of theft really are in the sense that they are not the kinds of

institutions that assist individuals in plan coordination. If they were truly efficient,

people would adopt them voluntarily.

THE ROLE OF PROPAGANDA

Government doesn’t always resort to outright violence or threats of violence to

maintain its powers; excessive use of such tactics could incite a revolution, as they have

on occasion throughout history. Consequently, it also operates a massive fraud

operation designed to perpetually pull the wool over the public’s eyes.9 Or in the polite,

9
While hypocritically policing “consumer fraud” through the Federal Trade Commission.
Government is exempt from FTC regulation.
 7

euphemistic language of academic discourse, it “manipulates constitutional-level

transaction costs.”10

The average citizen is “rationally ignorant” of most governmental policy issues,

increasingly so as the size and scope of government increases. The Federal Register, for

example, contains more than 80,000 pages of fine-print regulations that affect every

industry in America, and almost all aspects of our lives. No human could possibly

possess knowledge of anything but a minuscule portion of such a monstrous document .

Federal tax laws and regulations are just as voluminous. This suggests that it is quite

absurd to believe that voters are actually voting for real changes in public policy. How

could they be voting for changes in policy if they have no way of understanding what

more than a minuscule fraction of government policy consists of?

It is not in the average citizen’s financial interest to invest sufficient time to

become well informed in any but a few areas of public policy. This gives special-interest

groups -- including government officials and employees themselves -- the latitude to

manipulate political outcomes in democracies in ways that benefit themselves at the

expense of nearly everyone else, which is hardly an “efficient” outcome. As Joseph

Schumpeter observed more than 50 years ago:

What we are confronted with in the analysis of political processes

is largely not a genuine but a manufactured will . . . . So far as this
is so, the will of the people is the product and not the motive power
of the political process.11

10
Charlotte Twight, “Government Manipulation of Constitutional-Level Transaction
Costs: A General Theory of Transaction-Cost Augmentation and the Growth of
Government,” Public Choice, vol. 56, 1988, pp. 131-152.
11
Joseph Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper &
Row, 1950), p. 263.
 8

The hoary welfare economics dictum that special-interest transfer payments

should be considered to be efficient as long as, in theory, the winners can compensate the

losers (i.e., taxpayers) is a red herring argument. No such compensation has ever

occurred, and even if it had, it is not clear that it could ever be efficient by the criteria

established by neoclassical economics.

Far from Stigler’s (and Wittman’s) implicit assumption of near perfect

information among voters, real-world voters are, for the most part, grossly uninformed

about what government is up to. To make matters worse, much of what they do “know”

is self-serving propaganda that is repeatedly broadcast to them by government itself.

Government spends billions of dollars attempting to persuade the public that policies that

in reality only benefit a small special interest group, including the state itself, are really in

“the public interest.”

In Official Lies: How Washington Misleads Us, James Bennett and I detailed

how institutionalized governmental lying pervades all areas of government policy.12 In

welfare policy, government statistics do not count cash-and in-kind subsidies as part of

the income of “the poor,” nor does government subtract out taxes from the income of the

more affluent when publishing its “income distribution” statistics. This allows it to

perpetually complain about the “inequity” of capitalism and to advocate egalitarianism.

Farm subsidies go mostly to large corporate farms, although decades of

propaganda have convinced millions of Americans that it is the “small family farm” that

is the primary beneficiary. From the time oil was discovered in the U.S. in the 1860s,

various government agencies have been warning of an impending depletion of the oil
 9

supply unless there is a governmental takeover. Government-funded lies about

environmental policy are almost too numerous to count. Military policy lies are so

pervasive that “Pentagon propaganda” has become a redundancy.

Governmental control of schooling has always been motivated by a desire on the

part of politicians to brainwash children in one ideology or another.13 John Lott has

argued that this is so because such brainwashing makes government’s income-transfer

schemes more palatable to the public, which in turn makes it easier for politicians to

maintain power by buying votes with taxpayers’ money. It reduces the transactions costs

of wealth transfers, in other words.

Although there are countervailing forces, such as certain educational institutions,

the internet, talk radio, etc., it is nevertheless true that government still has the ability to

drown out most other voices with its vast propaganda resources. And it doesn’t need to

drown all other voices out; only enough of them so that a majority of the rationally

ignorant, voting public continues to believe its lies.

These countervailing forces of public opinion have the deck stacked against them

in a most lopsided way. When it created the welfare state the federal government chose

to administer its programs through thousands of ostensibly private, nonprofit

organizations. The same is true of many other government programs regarding

environmental policy, civil rights policy, old-age policy, labor policy, etc. These

nonprofit organizations (including labor unions) are the recipients of billions of dollars

12
James T. Bennett and Thomas J. DiLorenzo, Official Lies: How Washington Misleads
Us (Alexandria, VA: Groom Books, 1992).
13
Thomas Sowell, Inside American Education (New York: Free Press, 1993); E.G.
West, Education and the State: A Study in Political Economy (Indianapolis: Liberty
Press, 1965/1994).
 10

annually in government grants. Much of this money goes not to assist the poor or the

elderly, to improve the environment, etc., but to finance the lobbying for bigger budgets

for the governmental agencies that made the grants in the first place.14 Here’s how it

works: 1) Government agencies grant taxpayer dollars to nonprofit groups to ostensibly

administer government programs; 2) The groups devote half or more of the money

(illegally) to a lobbying and publicity campaign in favor of greater taxpayer funding for

the program; 3) Congress is “persuaded” to spend more on the program; 4) This allows

the nonprofit groups to receive even bigger grants; 5) the whole cycle starts over again

from step 1. The “will of the majority” is much more of a government-manufactured will

than even Joseph Schumpeter imagined. Stigler’s basic assumption that governments

faithfully respond to the wishes of “society” rests on a very weak foundation indeed.

In addition, nearly every state-funded university in America is a de facto “think

tank” for the promotion of statism. It should be a surprise to no one that as government

funding has so overwhelmingly dominated the financing of higher education, most

academics who have anything to say about public policy have become paid mouthpieces

of the state. Their claims of academic freedom ring hollow.

Stigler’s theory of efficient government is based on a model of perfectly

competitive government, but in reality the government has long established a system of

barriers to entry into politics that renders national politics monopolistic. This, too, is a

fatal flaw in Stigler’s model.

It has not been at all unusual over the past 50 years for well over 90 percent of all

congressional incumbents to be reelected in each election cycle because of the formidable

14
James T. Bennett and Thomas J. DiLorenzo, Destroying Democracy: How
 11

incumbent-protection rules and institutions that have been put into place. Incumbent

members of Congress receive over $100 million annually in “free” mailing privileges

which they use to send campaign literature to their home districts and states. Challengers

must pay their own way.

Each congressional representative has more than two dozen taxpayer-financed

“staffers,” while senators have about 75 staffers each. These individuals effectively

comprise a permanent, taxpayer-funded campaign staff. Challengers must raise money

privately to hire their campaign staffs.

Incumbents in Congress have created dozens of committees and subcommittees,

the purpose of each is to make sure that each incumbent can be on a committee that

specializes in dispensing taxpayer dollars and/or special favors to the voters of his or her

district or state. Farm-state legislators will be on various agricultural committees, for

example, whereas those from urban areas will sit on the Banking and Urban Affairs

committee. Since it is illegal for challengers to buy votes, this too creates a formidable

barrier to entry into politics. Incumbents are free to use taxpayer dollars to buy votes, but

challengers can only make vague promises to do so.

In Stigler’s perfectly competitive government, any policy that is opposed by

enough people will be replaced though the electoral process, just as consumers will

replace an inferior product by “voting” with their dollars. But that’s only (remotely)

possible if there is a reasonable degree of competition in government. In the U.S. federal

government, there is not. Even at the state and local levels of government in the U.S.,

consolidation of local governments and state and federal mandates that tend to

Government Funds Partisan Politics (Washington, D.C.: Cato Institute, 1985).

 12

homogenize local government policies render state and local government more

monopolistic.

Stigler was always a strong proponent of antitrust regulation for the private sector

for economic efficiency reasons. Yet, he strangely maintained that monopoly

government was somehow economically efficient.

FINANCIAL SUBTERFUGE

Another fundamentally fraudulent aspect of democratic governments is their

proclivity to hide or disguise the true costs of their operation through various subterfuges,

such as off-budget spending, while simultaneously spending billions on propaganda

campaigns that wildly exaggerate the supposed benefits of government programs and

activities. For well over a century federal, state, and local governments in the U.S. have

responded to citizen demands for tax cuts, expenditure restraints, or debt limitations by

paying lip service to these demands while at the same time creating myriad off-budget

enterprises that can spend money without the direct approval (via referendum, for

example) or even knowledge of the voters.15 At the state and local levels of government,

time and time again, when faced with voter rejection of a spending referenda, politicians

have routinely responded by establishing off-budget enterprises funded by non-voter

approved “revenue bonds.” At the federal level of government, debt finance permits the

state to disguise the true cost of government, as does the “fiscal illusion” created by

dozens of well-hidden excise taxes. There is even a “Federal Financing Bank” that was

15
James T. Bennett and Thomas J. DiLorenzo, Underground Government: The Off-
Budget Public Sector (Washington, D.C.: Cato Institute, 1983).
 13

set up in 1974 specifically to place certain kinds of (politically unpopular) spending off

the books and to keep it well hidden from the taxpayers.16

The essential question that is raised by all these subterfuges is: If these

government programs are genuinely in the “public interest” and efficiency enhancing,

why then do politicians consistently go to such great lengths to keep the public from

learning about them?

GOVERNMENT AS EXTORTION ARTIST

Another characteristic of democratic governments that calls into question the

validity of Stigler’s government-is-always-efficient claim is Fred McChesney’s well-

researched thesis that much of modern democratic government is essentially a protection

racket.17 McChesney models and catalogues dozens of examples of the phenomenon of

politicians threatening (with proposed laws and regulations) to confiscate the wealth of

various individuals or groups unless they (the politicians) receive payoffs and bribes in

the form of campaign contributions and other payments. “Payments to politicians are

often made,” writes McChesney, not for particular favors but to avoid . . . political

disfavor, that is, as a part of a system of political extortion.”18 Congressmen and

congressional staffers even refer to such legislation as “juice bills,” designed to

“squeeze” money from potential contributors, or “milker bills,” designed to “milk”

money from corporations that would be harmed by say, a price control law affecting their

16
Ibid.
17
Fred McChesney, Money for Nothing (Cambridge, MA: Harvard University Press,
1997).
18
Ibid., p. 2.
 14

industry. The threat of price controls or an excise tax imposed on an industry can result

in millions of dollars in campaign contributions from the threatened industries.

Even Stigler’s vaunted sugar price support program would fall under

McChesney’s “extortion” designation. The sugar program, like so many government

subsidy programs, must be renewed every couple of years. That way, every couple of

years members of Congress are guaranteed of a new round of bribery as both the sugar

farmers and the opponents of the program lobby and make campaign contributions to

hopefully shape the “new” bill in their favor. This same game is played every five years

with a new “farm bill” that goes before Congress. This encourages the maximum amount

of rent seeking, and thus the maximum amount of economic efficiency. Consequently,

the longer-lived a special-interest transfer program is, the more economic destruction it

will have caused in terms of wasteful rent seeking. Stigler and Wittman have it all

backwards.

THE MYTH OF POLITICS AS “JUST ANOTHER MARKET”

The government-is-always efficient theories of Stigler and Wittman assume that

there are no significant differences between private property markets and politics.

“Markets are markets,” they would say. Wittman even says that political “markets” are

“sufficiently like” private property markets that whatever conclusions hold for private

property markets must also hold for politics as well. This is the key assumption of his

analysis, and of Stigler’s as well, but it is based mostly on faith.

One implication of this assumption is that government pursues its goals every bit

as efficiently as does any private business. This is most certainly false because of the
 15

stark differences between profit management in private property markets and

bureaucratic management in government. As Mises pointed out, because there is no cash

value on the market of any governmental agency (they cannot be bought and sold), and

there are no profit-and-loss statements in an accounting sense, there is simply no way to

know how “efficient” a government enterprise is in pursuing its objectives. Economic

calculation is impossible.19

In private property markets entrepreneurs tend to allocate capital in ways that

satisfy the most urgent wants of consumers. Resources are allocated and reallocated to

their highest-valued uses. No such thing occurs in government, since resources are

allocated largely according to the degree of political clout of various special-interest

groups, not private capital markets. Government budgets only provide information on

the amounts of tax dollars spent on particular programs but say nothing (nor can they)

about the opportunity costs of those expenditures, i.e., the subjective value of alternative

uses of those tax dollars either by taxpayers or by other government agencies.

In profit-seeking businesses the managers’ behavior is guided by considerations

of profit and loss; in government, managers’ behavior is guided by arcane, voluminous,

and often arbitrary bureaucratic rules.20 It has to be this way if elected officials are to

have any control at all over the bureaucracies that they allocate taxpayers’ revenues to.

In other words, it is impossible to think of government bureaucracies as being “efficient”

in the allocation or resources in the same sense as private competitive businesses are.

Not to mention the other, widely-discussed incentives for inefficiency that are know to

19
Ludwig von Mises, Human Action: A Treatise on Economics (Auburn, Alabama:
Mises Institute, 1998), p. 305.
 16

exist in all government bureaucracies. Indeed, there is wide agreement in the public

choice literature and elsewhere that government bureaucracies are best viewed as cost or

budget maximizers rather than as cost minimizers, as is the case with private competitive

firms.

POLITICAL VERSUS PRIVATE PROPERTY ENTREPRENEURSHIP

Private property entrepreneurs succeed by discovering ways to reduce costs and

prices, improve product or service quality, or by inventing new products that meet the

approval of consumers. They succeed, in other words, by catering to consumers. If they

fail to please consumers, they lose money or go bankrupt.

In politics, the opposite is often true: “entrepreneurial” politicians “succeed” by

avoiding the minor constraints imposed on their behavior by the elections that are held

every two or four years. The most “successful” political “entrepreneurs” are the ones

who are most adept at convincing a gullible, public school-educated, rationally-ignorant

public that they can offer them something for nothing. They are the slickest liars and

propagandists. Bill Clinton was arguably the biggest and best liar in American politics

over the past half century and he was also one of (if not the) most successful politicians

as well. As discussed above, successful political “entrepreneurs” are good at telling

official lies about government policy; hiding the costs of government with fiscal illusions

created by excise taxation and debt finance; creating off-budget government enterprises

to further hide the true costs of government from the public; and allocating large amounts

of taxpayer dollars to nonprofit sector special interest groups who grossly exaggerate the

20
Ibid., p. 306. See also Anthony Downs, Inside Bureaucracy (Boston: Little, Brown,
 17

benefits and understate the costs of special-interest legislation. There is an occasional

reformer who genuinely does succeed at making government somewhat more efficient,

such as former Jersey City, New Jersey mayor Brett Schundler, but they seldom last very

long in politics (as is the case with Mr. Schundler, who was trounced in the November

2001 New Jersey gubernatorial election).

DOLLARS VERSUS VOTES

In private property markets consumers “vote” with their dollars, to make a

Stigleresque analogy. This means that consumers can decide for themselves just how

much of any product or service they want, if they want it at all. And they are perfectly

free to change their minds more or less constantly by engaging in market transactions.

Moreover, all market exchanges are voluntary; no one is forced into them. Market

exchange is always mutually beneficial as long as it is voluntary.

In dramatic contrast, political “exchange,” takes place very seldom. During any

six-year period, each voter is allowed to vote twice for president, four times for a U.S.

representative, and at most, three times for a U.S. Senator, even though those individuals

are among the 535 men and women who allocate more than a third of GDP and enforce

literally tens of thousands of regulations that affect nearly all aspects of our lives.21

Moreover, since citizens have no capability to understand anything but a minuscule

1966).
21
Don Boudreaux makes this point in “Was Your High-School Civics Teacher Right
After All? Donald Wittman’s The Myth of Democratic Failure,”, The Independent
Review, vol. 1, Spring 1996, p. 117.
 18

percentage of what government does the act of voting is more analogous to judging a

beauty contest or attending a sporting event than a market transaction.22

Voting is an all-or-none choice. No disaggregation of issues is permitted, in the

sense that the free market allows consumers to “disaggregate” products (I like Coke, you

like Pepsi). Once majority rule has decided the winner, that candidate’s administration

will prevail, creating “political externalities” to all voters both to the left and the right of

that winning candidate. For example, if we used democracy to determine what kind of

shoes to produce, and the majority wanted to produce men’s shoes in size 10D, then we

would become a nation of sore feet, as everyone with bigger or smaller feet would be

inconvenienced and would have to rely on black market shoes. This is analogous to

market exchange?

THE IMPORTANCE OF PRIVATE PROPERTY

On an even more fundamental level, markets rely crucially on private property

and the enforcement of contracts. Without private property there can be no markets;

without markets there can be no economically meaningful prices; and without market

prices rational economic calculation -- and a functioning economy -- is impossible.

Property rights provide individuals with incentives to work and produce and to improve

one’s ability to do so through training and education, for stable property rights allow one

to reap the fruits of such labors.

In contrast, for the most part, democratic government involves a process of one

group of citizens bribing legislators to attenuate the private property rights of others for

22
Goeffrey Brennan and Loren Lomasky, Democracy and Decision (New York:
 19

no other reason than the first group wishes to (legally) steal the others’ property.23 It is

the domain of rent-seeking behavior. The business of modern democracy is to attenuate

property rights in order to fuel the special-interest, rent-seeking machine. This is very

much the opposite of voluntary, consensual, private property markets. Merely repeating

over and over that “politics is like markets,” as Stigler, Wittman, and some other Chicago

School scholars have done, does not make it so. The attenuation of property rights that is

the defining characteristic of democracy weakens incentives to be productive while

increasing the rewards of unproductive rent seeking.

One implication of this is that the people who rise to the top in democratic

governments are those who are adept at orchestrating the rent-seeking game. Indeed,

years of experience at lower levels of office (city council, state legislature) is the usual

prerequisite or higher office. As Hans-Hermann Hoppe puts it, “democracy virtually

assures that only dangerous men will rise to the top of government.”24 Dangerous, in the

sense that they are adept at destroying property by facilitating the plunder of rent seeking.

As rent seeking becomes more pervasive in a democracy, more and more people will

decide to try to become adept at it rather than becoming genuinely productive citizens.

The proportion of parasites will rise relative to producers which will cause national

wealth to be lower than it would otherwise be. As Hoppe has written:

Cambridge University Press, 1993).

23
A study prepared for the Joint Economic Committee of Congress in 1998 concluded
that only 14 percent of all federal expenditures could conceivably be construed as
“economically productive” expenditures that facilitated economic growth, as opposed to
pure transfer payments. See James Gwartney, Robert Lawson, and Randall Holcombe,
“The Size and Functions of Government and Economic Growth,” Prepared for the Joint
Economic Committee, Washington, D.C., 1998.
 20

[A]ny income or wealth redistribution within civil society implies

that the recipients are made economically better off without having
produced either more or better goods or services, while others are
made worse off without their having produced quantitatively or
qualitatively less. Not producing, not producing anything worthwhile,
or not correctly predicting the future and the future exchange-demand
for one’s products thus becomes relatively more attractive . . . as compared
to producing something of value and predicting the future exchange-demand
correctly. Consequently . . . there will be more people producing less and
displaying poor foresight, and fewer people producing more and predicting
well.25

This is not a very “efficient” prospect.

Private property markets induce many people to moderate their rate of time

preference and be somewhat future oriented. Homeowners, for example, have incentives

to preserve the value of their property because any appreciation accrues solely to them

upon sale, as do any losses. Democratic government, on the other hand, promotes an

increase in the rate of time preference (short-term thinking) or what Hoppe calls the

“infantilization of society” with its constantly expanding taxation and spending, inflation,

and unending flood of special-interest legislation designed to satisfy every perceived

want of every segment of the electorate.26 This is another important source of

inefficiency that Stigler and Wittman pay no attention to.

DEMOCRACY AS BANDITRY

Modern democracies have evolved into gangs of bandits who rely on the public’s

worshipful attitude toward democracy (promoted for generations in the government-run

24
Hans-Hermann Hoppe, “The Democratic Leviathan,” (www.mises.org, January 1,
2002). See also his book, Democracy: The God that Failed (Brunswick, NJ:
Transaction, 2001).
25
Ibid., p. 32.
26
Ibid.
 21

schools) to “justify” the game of stealing one person’s property in order to buy votes

from two or more others with it. But America’s founding fathers did not believe in

democracy and they did not establish one, and for good reason: They understood that

democracy would quickly become the kind of system that we have today. In hindsight,

they were naive to believe that the Constitution would be sufficient to block this

outcome.

One political theorist who understood this was John C. Calhoun, the former

American congressman, senator, secretary of war, and vice president. Calhoun

understood that under any kind of democracy the community will inevitably be divided

into “two great parties, a major and a minor, between which there will be incessant

struggles on the one side to retain, and on the other to obtain the majority -- and thereby,

the control of the government and the advantages it confers.”27

There would be “two great hostile parties,” comprised of “the payers of the taxes

and the recipients of their proceeds,” with the inevitable result that society will be

divided into “two great classes; one consisting of those who, in reality, pay the taxes,

and, of course, bear exclusively the burden of supporting the government; and the other,

of those who are the recipients of their proceeds (the tax-consumers).”28

Because of the powerful incentives that the tax-consuming class would have to

plunder the taxpaying class, Calhoun did not believe that the Constitution was sufficient

to keep the government from becoming a permanent instrument of plunder. The tax-

consuming majority would perpetually “endeavor to elude” all constitutional restrictions

27
R.M. Lence, editor, Union and Liberty: The Political Philosophy of John C. Calhoun
(Indianapolis: Liberty Fund, 1992), p. 16.
28
Ibid., p. 19.
 22

on their plundering ways, and they would wage a relentless propaganda campaign to

portray such restrictions as “folly.”29 Calhoun supported the rights of secession and

nullification, as did nearly all of the founding generation, and introduced the concept of a

concurrent majority -- the right of a subgroup of the population, such as a state, to veto

unconstitutional legislation. All of these protections against the plunder of democracy

were abolished in 1865 when the federal government finally established its supremacy

over the states and the citizens and appointed itself as the final arbiter of constitutionality.

The kind of constitutional republic that existed in the U.S. prior to 1865 had very

few income transfer programs. The only contact the average citizen had with the federal

government was through mailing a letter. There were no long-lived income transfer

programs, and the economy was much more efficient as a result. It is the post-war

democracy, not the constitutional republic of the founding fathers, that Stigler and

Wittman theorize as efficient, which again seems altogether backwards. There are many

varieties of democracy, but Stigler and Wittman treat all of them equally. In doing so

they ignore literally centuries of political philosophy, including modern public choice

theory, that has much to say about how all the various permutations of democracy have

led to very different results over time and space. Economists can arrive at some awfully

absurd conclusions if they insist on ignoring the study of history and philosophy while

commenting on such momentous issues as the successes and failures of democracy.

*Thomas J. DiLorenzo is professor of economics in the Sellinger School of Business and

Management at Loyola College in Maryland.

29
Ibid., p. 27.
 23

BIBLIOGRAPHY

Bennett, James T. and Thomas J. DiLorenzo. Official Lies: How Government

Misleads Us. Alexandria, VA: Groom Books, 1992).

____________________________________. Destroying Democracy: How

Government Funds Partisan Politics. Washington, D.C.: Cato
Institute, 1985.

_____________________________________. Underground Government:

The Off-Budget Public Sector. Washington, D.C.: Cato Institute,
1983.

Boudreaux, Donald C. “Was Your High School Civics Teacher Right After
All? Donald Wittman’s ‘The Myth of Democratic Failure.’” The
Independent Review 1 (Spring 1996).

Brennan, Goeffrey and Loren Lomasky. Democracy and Decision. New

York: Cambridge University Press, 1993.

DiLorenzo, Thomas J. The Real Lincoln: A New Look at Abraham Lincoln, His
Agenda, and an Unnecessary War. New York: Forum/Random House,
2002.

Downs, Anthony. Inside Bureaucracy. Boston: Little, Brown & Co., 1966.

Gwartney, James, Randall Holcombe, and Robert Lawson. “The Size and
Functions of Government and Economic Growth.” Washington, D.C.:
Joint Economic Committee, 1998.

Hoppe, Hans-Hermann. Democracy: The God That Failed. New Brunswick,

N.J.: Transaction, 2001.

___________________. “The Democratic Leviathan.” (www.mises.org, January 1,

2002.

Huber, Peter. Liability: The Legal Revolution and its Consequences. New York:
BasicBooks, 1988.

Hume, David. “Of the Original Contract,” in A. MacIntyre and D. Hume, editors.
Hume’s Ethical Writings. New York: Collier Books, 1965.

Lence, R.M., editor. Union and Liberty: The Political Philosophy of John C.
Calhoun. Indianapolis: Liberty Fund, 1992.
 24

McChesney, Fred. Money for Nothing. Cambridge, Mass.: Harvard University

Press, 1997.

Mises, Ludwig von. Human Action: A Treatise on Economics. Auburn, Ala.:

Mises Institute, 1998.

Rubin, Paul, and Martin Bailey. “The Role of Lawyers in Changing the Law.”
Journal of Legal Studies 23 (June 1994).

Schumpeter, Joseph. Capitalism, Socialism, and Democracy. New York: Harper

and Row, 1950.

Sowell, Thomas. Inside American Education. New York: Free Press, 1993.

Stigler, George. “Law or Economics?” Journal of Law and Economics 35 (October

1992).

Twight, Charlotte. “Government Manipulation of Constitutional-Level

Transaction Costs: A General Theory of Transaction-Cost
Augmentation and the Growth of Government.” Public Choice 56
(1988).

West, E.G. Education and the State: A Study in Political Economy.

Indianapolis: Liberty Press, 1965/1994.

Wittman, Donald. The Myth of Democratic Failure. Chicago: University of Chicago

Press, 1995.